Kelley gets OK as trustee for Petters' businesses

After two months of legal wrangling, Doug Kelley was confirmed Thursday as trustee for much of the bankrupt corporate estate of Wayzata businessman Tom Petters.

An Illinois creditor had argued that Kelley would have a conflict of interest because he's also the receiver for the companies, a judicial appointment that would require him to favor the government in criminal forfeiture proceedings that might ensue if Petters is convicted of charges that he ran a massive Ponzi scheme.

U.S. Bankruptcy Judge Gregory Kishel wrote in a 35-page order Thursday that the issue presented novel legal arguments regarding the authority of two different federal courts. But he ruled that Kelley has demonstrated through his actions that no actual conflict exists, and he noted that Kelley has stated his intention to protect the bankruptcy claims of creditors.

"There is no indication in the record ... that Kelley has ever taken any action that was self-interested, contrary to the interests of the bankruptcy estates, or in any way inconsistent with the obligations of a fiduciary steward of the estates," Kishel wrote.

Kelley's appointment was opposed by Richie Capital Management of Lisle, Ill. It claimed that the Petters organization consists of two divisions: Petters Group Worldwide (PGW), the holding company for valuable assets such as Polaroid, and Petters Company Inc., a financing entity with few recoverable assets.

The fund's attorneys said Richie's investment was with PGW, and they didn't want Kelley representing both corporate entities. Earlier in the case, Richie got its own receiver appointed over both entities by a state judge in Illinois. That appointment was overruled by a federal judge in Minneapolis who appointed Kelley receiver in October.

Kishel said appointing another receiver would be an unreasonable expense for the estate.

"Kelley has gone up an immensely steep learning curve in the last five months; he has had to amass knowledge, and analyze it with his professional persons; he is making use of that to regain assets, via legal proceedings and otherwise," Kishel said.

Kelley has run most of the Petters' companies since federal agents raided Petters' offices, his home, and the homes of several others who were involved with Petters in what the government alleges was a $3.5 billion investment fraud scheme. Petters has maintained his innocence, although several of his associates have pleaded guilty to charges stemming from the alleged fraud.

"On its face, the order fixing Kelley's duties as receiver did not vest him with any interest aligned with the United States, nor mandate any action on his part that would make him its servant, agent, or ally," Kishel wrote in his order. He said the directive to Kelley as receiver is "unadorned" and does not obligate him to "consort" with federal prosecutors at the expense of creditors.

"The only duty placed on Kelley from the face of the receivership orders, is to 'hold in place,' to keep the assets secure pending their ultimate disposition via separate court proceeding," Kishel said.